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What Is a Contingency Fund?

A contingency fund is a reserve of money set aside for unexpected expenses. In addition to a positive cash flow, savvy businesses will maintain a contingency fund in order to afford expenditures that are beyond the standard operating budget. Unexpected expenditures may include:

An increase in the cost of supplies or equipment

New technology

Repairs or replacement of crucial equipment

Unanticipated legal/ business fees

Diminished sales

Worker strike

Types of Contingency Funds

The Best contingency funds are liquid assets such as cash and reliable stocks. Unlike other assets, cash allows a business to handle unexpected occurrences as efficiently as possible.

The liquidity of stocks and bonds is subject to change. The most liquid stocks and bonds tend to be the ones that are most highly traded.

Ideally, a contingency fund will be managed to grow over time. However, a contingency fund should remain as stable and as liquid as possible. In other words, your contingency fund should have the ability to immediately convert to cash.

Alternatives to Contingency Funds

Without a contingency fund, a business must resort to alternative methods for covering unexpected debts or costs. Alternatives include:

A line of credit

Loans

Business Interruption Insurance

Seeking Legal Help

If you need assistance developing or maintaining an effective contingency fund for your business, you should consult an experienced business attorney.